Although the term ‘embedded finance’ (meaning the embedding of financial services into digital products) may be new to many, it is not a particularly new concept. Especially not to online retail. Ever since the e-commerce boom of the late 90s, people have been making payments via websites and platforms. It might be far from the frictionless user experience you get today, but undeniably it was still embedded finance
Fast forward to the launch of the App Store in 2007. Almost as soon as people had apps on their phones, they were making payments on them. None of this was a surprise. The finance and retail industries have always had a relationship. Many major retailers have offered some form of credit – or even their own credit card – for decades. For most retailers, the cost of building their own financial infrastructure has always been out of reach. Digitalising that infrastructure didn’t change that.
But, their relationship has come a long way. According to one study, across the UK, Germany and Belgium, 75% of retailers are using embedded finance to offer credit cards, ‘Buy Now, Pay Later’ (BNPL) schemes and loyalty incentives, while 56% are planning to introduce further financial services in the near future.
The pandemic has accelerated this immensely. Across Western Europe, e-commerce sales grew by almost 30% from 2019 to 2020 as the percentage of consumers shopping online rocketed from 60% to 96%. In the UK alone, 85,000 businesses launched online stores or joined online marketplaces for the first time.
This, in turn, saw a huge increase in the uptake of embedded finance options, with BNPL one of the biggest benefactors. In 2021, Swedish payments provider Mollie saw a 51% increase in BNPL while BNPL behemoth Klarna became Europe’s most valuable start-up.
There are three main reasons embedded finance is so popular among online retailers. First, thanks to APIs, installing one of these options at checkout is now quick and cost effective. Second, it’s proven to increase engagement. And thirdly, there is clearly a huge appetite and thus, the market is growing fast. 69% of millennial shoppers are more likely to shop if BNPL is available and it’s predicted digital wallets will account for 51% of e-commerce payments by 2024.
However, the opportunity goes far beyond this. The next era of embedded finance will be all about offering consumers a vast range of personalised financial services. Moving beyond just BNPL and payments and into insurance, wealth management and even banking itself. Plus, these services won’t just be offered at the point of sale but exactly at the point of need.
Andreessen Horowitz’s Angela Strange famously said “every company will be a fintech”. She was right. Embedded finance is predicted to be worth $3.5tn by 2030, with retail set to make up almost half of that.
However, up until recently, fully making the most of embedded finance was still harder than it needs to be.
Excellent products, clashing APIs
Don’t get me wrong, embedding financial products is still far quicker, easier and more cost effective than building anything from scratch.
The problem? All of these products have different APIs. Even among similar products. Integrating with one financial service provider is quick and cost effective. However, finding and partnering with multiple providers is not.
A good way to think about it is how your laptop, phone, tablet, router, headphones and sound system all have entirely different charging ports. Buying one charging cable is fine. Buying multiple charging cables – less so. The solution? A multi-adapter. Or an embedded finance aggregator. Aggregators partner with a number of fintechs to build vast ecosystems of financial products. These then become available with one integration.
Aggregators are essentially a multi-adapter for embedded financial services. With just one integration, online retailers can gain access to as many of these services as they and their customers need.
So much more than just BNPL
With one integration, online retailers from any sector can gain access to new financial products to offer their customers including business loans, cards, virtual accounts, cross border payments, foreign exchange and more.
Online retailers can essentially become a one-stop-shop for financial services, allowing their customers to conduct all of their financial business on their site and platform. These can be products that enhance their current offering but they can also be entirely new products and revenue streams.
If they choose, online retailers can even become banks themselves – something modern consumers have an appetite for. According to one report from Cornerstone Advisors, most consumers under the age of 55 would be willing to open a bank account with non-banking providers like Amazon, Google, Starbucks and Uber.
As embedded finance expert Simon Torrance says: “It’s a way for all kinds of companies in all kinds of sectors to hook into people’s everyday activities, create new relationships with their customers, and help businesses think differently about their space in the world.”
Multiple benefits for online retailers
By offering their customers additional financial services, online retailers are able to open proven new revenue streams. There are a number of ways this can happen, including commission from the providers, the charging of fees for additional services or specialist accounts or earning on interchange.
Furthermore, by creating their own ecosystems of financial services, online retailers can increase retention and engagement. Research from Accenture and with open banking platform Plaid, found 87.5% of non-financial companies that have begun to offer financial solutions had increased engagement levels, while 85% said they’d attracted new customers.
By offering personalised services at the point of need, retailers tend to see an increase in sales too. According to one report by Gartner, organisations that invest in personalisation, typically outsell competition by 30%.
Now, thanks to embedded finance, online retailers can create new and improved, seamless customer experiences with one integration. By offering customers genuine, personalised services at the point of need, they are able to help them better manage their finances, protect themselves and their families, grow their business and improve their all round financial wellness.
The big question is which online retailers will move first and thrive in this new era.